JP Morgan To Pay $2 Billion Settlement In Madoff Case

The headquarters of JP Morgan Chase on Park Avenue December 12, 2013 in New York. JP Morgan Chase and federal authorities are close to a USD $2 billion settlement over the bank's ties to financier Bernard L. Madooff that involve penalties and deffered criminal prosecution. (Stan Honda/AFP/Getty Images)

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Originally published on January 14, 2014 5:14 pm

JP Morgan Chase is expected to reach a deal with federal authorities this week to pay about $2 billion in civil and criminal penalties to the government for its ties to Bernie Madoff.

The bank is suspected of ignoring signs of Madoff’s criminal financial scheme in order to win more commissions on services it provided.

With this payout, JP Morgan will have paid $20 billion to the government in the past year to resolve investigations.

The government reportedly plans to give some of the $2 billion settlement to investors affected by Madoff’s Ponzi scheme.

JPMorgan Chase, this week, could finalize a $2 billion criminal and civil settlement with federal prosecutors who suspect that the banking giant ignored signs of the Bernard Madoff Ponzi scheme. JPMorgan was Madoff's primary bank for more than 20 years, and this settlement contains some very interesting provisos.

Here with more is Cardiff Garcia, reporter with the Financial Times. Hi there, Cardiff.

CARDIFF GARCIA: Hey, Meghna.

CHAKRABARTI: So, first of all, remind us: What exactly were the charges or allegations against JPMorgan regarding the Madoff Ponzi scheme?

GARCIA: Yes. So the charges are all related to JPMorgan's failure to alert regulators about its suspicions that Madoff might be a fraud, that he might be a Ponzi schemer. And, for instance, we have employee emails that were reported later on showing that some employees were, in fact, suspicious of Madoff. There's a part of the bank that was careful not to invest its own funds with Madoff, because it couldn't quite figure out how Madoff was making his money.

And there's also something in the U.S. called a suspicious activity report, which is exactly what it sounds like. And the bank filed a report similar to that in the United Kingdom, but not - curiously enough - in the U.S. And then there's also part of these charges that are related to what regulators consider to be the bank's internal - lax internal controls related to finding out when money laundering or when fraud's taking place.

CHAKRABARTI: Right. So I'm seeing one of those emails, those employee emails that you mentioned from before December 2008, when Madoff was arrested. And the email contains the phrase: Someone just told me that there is a well-known cloud over the head of Madoff, and that his returns are speculated to be part of a Ponzi scheme. Interesting. Now, this $2 billion settlement with the federal government, where's that money going to go? Is any of it going to be returned to the victims of the Ponzi scheme?

GARCIA: Yeah. That's very likely. I mean, we actually don't know just yet. We're expecting to get the final word on what's going to happen later this week. But it's very, very likely that the bulk or the majority of those funds are going to end up going back to the clients. Some of that will also go back to the government.

CHAKRABARTI: OK. So I mentioned earlier that the settlement has some pretty interesting provisos. The most interesting one, something called the deferred prosecution agreement. What is that?

GARCIA: Yes. So this is essentially a proviso that says that the prosecutors will file the charges with the understanding that they'll later drop them, so long as the bank complies with certain provisions. So the bank is going to have to tighten up its internal controls. It'll probably have to, you know, spend a period of time during which something like this doesn't happen again. It's very unlikely to, I think. At which point, they'll drop the charges, and they'll just stick with the fine.

Interestingly enough, if there's something controversial about this, it's simply the prosecutors didn't demand that the bank plead guilty to the bank's secrecy act, which is essential the, you know, the federal law that it was supposed to comply with, here, and that it's accused of not having complied with, which has raised...

CHAKRABARTI: Well, it...

GARCIA: Yeah, go ahead.

CHAKRABARTI: I'm sorry. I'm sorry, Cardiff. But I was going to say: I think a guilty plea could have put JPMorgan's charter in question, right?

GARCIA: That's absolutely correct. And I think the issue here is that it started as a lawsuit. It started as a civilian issue. And to now bring criminal charges like this into it might seemed too harsh and, you know, who knows? The other side of that is that it shows that, once again, banks might be, if not too big to fail, too big to jail.

So this is - you know, we're getting a lot of this just from media reports, so it's all a little bit patchy. But at the same time, you know, these are sort of the issues that everybody is grappling with.

CHAKRABARTI: Well, in the last couple of seconds that we have, just quickly, Cardiff, if you could - this is a $2 billion settlement. But over the past year, JPMorgan's paid some $20 billion overall in various settlements to the government?

GARCIA: That's right. JPMorgan just wants to put this behind it. It's been saying for a long time that the Madoff issue in particular was nonsense. But really, at this point, JPMorgan just wants to move on with its year and get back to the business of banking. So they're trying to just, you know, get it over and done with.